Background of Tesco Firm

Tesco is one of the retail trade companies with foundations in over 14 countries worldwide. The company has over 492,000 employees, operating in it’s over 5,380 stores across the world. The firm was born in the mid 1920s. Jack Cohen founded the company and successfully released its first brand in the market in the year 1924. From that time, the company expanded to higher levels year after year. In the 1930s, Cohen opened headquarter in the north London increasing its customer coverage as well as rising the earnings. The organization earned a license as a private limited company in 1932. The company has managed to thrive through a strategy of buying the rival companies in the market. For instance, in 1950s, the company absorbed 70 Williams stores and 200 Harrow stores. The company realized high profit margins in the following years. The trend to absorb other companies and stores in the market continued when Tesco bought 97 Charles Philips stores in the 1960s (Clark 2012).

 The expansion of the company saw its entering into the book of records as the largest store in the whole Europe (Skinner 2008). The company then progressed to open superstore and managed to benefit from perfect positioning of the products in the market when most customers preferred supermarkets to small shops. The company has since improved and expanded its business to opening a petrol station, internet-shopping services, offering car and house insurance, and mobile phone network.

The company has managed to edge out the competitor companies in financial scales, spread, customer preference and employees satisfaction. The company’s sales have increased from £ 51.8 in 2008 to £ 60.93 in 2010 (Clark 2012). These earnings are a contribution of its six stores, which include Tesco Extra, Superstores, Express, Metro, Home plus and One Stop. Other businesses which play a role in the total earning of the company include the Tech Support company, Film making, gold exchange, Tesco Tyres, Salon among others (About Tesco 2012).  

Purpose of the evaluation

In any company, the functioning and advancement depends on how efficient the firm manages its finances. The company is currently experiencing diverse development in trying to expand to other areas in the world. This has influenced the company’s business structure, organizational structure, company culture and significantly the financial status of the company. However, this has not stopped the company from maintaining the competitive nature. To evaluate how the company has managed to excel despite the stiff competition in the marketing arena, the paper will analyze the financial strategy that keeps the company alive.

Financial performance

Successful management of the funds and the escalated profit margins are realized through sound financial management. The finance department in Tesco Company ensures that there is enough money for the expenses such as payment of debts, employees’ salaries and investment of cash for the continuity of the business advancement. The growth in the financial status of the company can be evaluated through studying the trend in earnings and the share price. In 2006, the earning per share was 20.07. This increased to 23.84 in 2007, 26.95 in 2008, 28.92 in 2009, 31.66 in 2010 and 33.10 in 2011. The profit recording for the company has been on the rise since 2002. The profits recordings for the past four years are as follows: £ 2,130 in 2008, £ 2,166 in 2009, £ 2,336 in 2010 and £ 2,671 in 2011, which has consistently increased. However, in 2011, the company recorded the worst sales in United Kingdom in a historical period of 20 years (Wood 2011). This resulted from consumer’s reducing their purchases of the non-foodstuffs in the company’s outlets.

 The company enjoys a higher share in the market compared to its competitors. For instance, in 2009, the company’s market share was 30.5% compared to its closest rival, Asda, which was 16.9%. According to 2011 financial analysis, the customer loyalty was higher in Tesco Company than in that of its competitors. The customer loyalty scaled at 29.7 % for Tesco and 18.5% for Asda - the closest competitor (About Tesco 2012).

Financial strategy and group treasury risk

The company has maintained its competitive edge by developing strong strategies for managing and preventing financial risk among other business risks. The possible risks that can threaten a business include unclear strategy, unavailability to meet business needs, fluctuations in interests and exchange rates. The company also seeks external advice for the best steps to be instituted in the management of the problems realized in the company strategy. There is also consistent reviewing of policies in the treasury functioning. 

Funding and liquidity

Liquidity is a state when a company cannot sufficiently finance its activities or the ability to secure such interest comes with an extra cost. This risk hinders the development of the company leading to funding risk. There is a dedicated treasury functioning established by the company with the aim of managing the liquidity and funding risk. The company also establishes conservative Balance Sheet structure with prudent risk appetite, which is guarded by explicit objectives that enhance combating of the two risks effectively.

Moreover, the company has established a strong liquidity position with a wide range of stocks. This ensures that the sales of the different commodities help to cover instances of hidden zones for possibilities of liquidity risk. In addition to this, Tesco Company has ensured that the retail trades other than the wider company manage lending of cash. This gives the retail trade a responsibility to monitor the lending and follow up to avoid bad debtors. The company also conducts a daily monitoring, management of key funding and liquidity ratios for early intervention before things slip to complicated levels. Another measure used by the company is conducting regular stress testing for determining the stability of the company in the market. These measures together ensures that the company manages its financial risk effectively, thus, retaining the position in the market.

Interest rate risk management

This form of risk arises in cases where liabilities and assets of an organization present different re-pricing dates. Tesco Company, especially the bank, counters this through minimizing the sensitivity of gross revenue to fluctuations in interest rates. The possible causes of the interest risk should be diagnosed and managed through position and sensitivity limits. The company uses Value at Risk to control interest risk, especially the short-term exposures.

 Success in the management of interest risk is attained due to the well-established policies in the company. The company operates under a policy of fixing interest rates minimum level of 40% of the realized and procrastinated debt interest expenditures. In 2010 financial year, the value of the debt at an established rate of interest was £6.2 billion. It was rated at 91% of the company’s total debt, leaving the other amount in floating rate form (About Tesco 2012).

Credit risk

Credit risk is the risk associated with losses realized from default by financial associate groups that fall in the list of reliable credit counterparties. To avoid such risk in Tesco Company, the retails hold an update of credit rating for such counterparties. The retail branches use a framework policy to evaluate the possibility of lending money to the customer. This policy has well delineated limits and standards depending on the level of the customer’s lifecycle. The ability of the customer to repay the debt is evaluated before lending. The policy also has monitoring scheme that is used to validate the affordability of the client to be offered a loan, thus, avoiding bad debtors. Among the most used frameworks for the assessment of the credit process there are such as Fitch, Standard and Poor’s ratings.

Funding in the firm

 A venture’s choice of the fund is usually influenced by the availability and accessibility of sources of fund. The corporate lifecycle theory can be used to determine the level or the position that a company/organization holds (Adizes 2008). It will be very crucial in the selection of the fund to ensure that the organization’s future is secure. A stable company will mostly show cash rich report, but it will be later on during the life cycle, when it reaches the aristocratic stage. This is actually the time when the company will reveal signs of aging. Organizations should avoid the reflection of aging since at this time the company may decline drastically (Wang 2005).

Modigliani and Miller theorem argues that an organizational value remains unaffected irrespective of the means of financing the company. However, the theory acknowledges that some factors have to be maintained. These factors include absence of taxes, bankruptcy costs, agency expenditures and asymmetric information, in addition to a state where, the company operates in an efficient market. This theory is also referred to as the capital structure irrelevance principle. The theorem has enhanced the use of leverage in the companies.

Tesco firm mainly uses the fund from the income generated from its varied ventures. This ensures the company ability to reduce the debts, loan interest and fines. In this vein, the company enjoys a stable financial strategy, which is maintained at the equilibrium within the internal environment of the firm (About Tesco 2012).  The choice of the fund can be explained using the corporate life cycle theory. The company is at the prime level where it can sustain most of its financial activities without involving the external sources of funds. Tesco uses profit gained as the main choice of fund. The company is also beneficially a shareholder of the firm. This offers the company revenue through dividends. This follows the authorization of the company to purchase its own share to a limit of 10%.

Dividend policy

Lintner model of dividends suggests that in cases of smooth dividends, there must be another factor(s), which dilutes the fluctuations in the functioning profitability. In an illustration, dividend absorbs only a part of the income deviations; thus, the company has to establish ways of stabilizing the other part of fluctuations (Myers, 2010).

 Other theories that have been used to describe dividend policy include the dividend relevance theory and the dividend irrelevance theory. The relevance theory holds that there exists the best dividend policy that the company must implement to achieve the best value for the firm (Theories of dividend policy, 2011). The market price is displayed to determine the value of the dividend. The dividend irrelevance theory illustrates that a company will pay only dividends from residual earnings i.e. after the crucial financial activities have been addressed. Modigliani-Miller theory holds that the firm is the core determinant of dividend value (Wang, 2005). Therefore, more care and interest should be directed to the firm.  

In a summary, the dividend irrelevant theory holds that dividend policy is irrelevant in cases where the firm is not facing taxes and bankruptcy cost. According to this theory, a company needs not to mind about the dividends since they influence insignificantly to the company capital structure.

 In respect to Tesco Company, the company values its dividends. The firm’s dividend policy was renewed in 2006. The dividend policy, namely “increasing the firm’s dividend pay-outs broadly in relation with its income escalation rate”, (About Tesco 2012) illustrates that Tesco’s dividends are considered relevant for prospect of the company. The company’s dividends have been on the rise showing proper management of the companies share market.  Thus, the best theory that explains Tesco’s dividend policy is Bird-in-the-Hand Theory. The company is determined to repay the dividend in the line of the profit margins realized.

Conclusion

The historic development and achievement of Tesco Company clearly illustrates a successful firm. From the time the company was started, it has continuously maintained commendable increment in profit and expansion. Despite the strong competition in the market, challenges in the economic field and inflation cases, the company has been able to survive. The financial assessment of the company reveals profound policies that have been formulated and laid down with an aim of close monitoring and corrections of hiccups once realized. The proactive nature of management has enhanced low operational cost in managing risk.

Recommendations

In order for the business to continue thriving in the market, the following recommendations may be crucial. The firm has to consider placing its products at an affordable price among the customers yet not losing its customers. This will ensure that the more customers will be able to purchase ample products rather than going for the optional cheaper products in the market. The company should consider developing strong risk assessment especially the liquidity-funding risk, credit risk, and interest rate risk. The company should also act swiftly in cases where there are financial losses. For instance, in 2009, the company recalled some of its products that were realized to incur loss. This should have been avoided through detailed research of the market regarding the brands. The company domination in one region UK (75%) could be detrimental in cases of calamity (Wood 2011). The company should diversify in other regions of the world in a great proportion.